Wednesday, 8 December 2010

Reward Management and Philosophy – What you need to define before formulating your policy

Employees have traditionally
invariably been paid with cash, only relatively recently organisations have focused
their attention on developing bespoke reward strategies, whose main aim is to help
businesses to attain their specific organisational objectives.

Until the 1980s in the
private sector, and even until more recently in the public sector, employee pay
and employment terms and conditions were determined by means of the collective
bargains made by management and trade unions more often than not at national or
industry level.

This “multi-employer”
bargaining system declined sharply during the 1980s and 1990s and continued
indeed to decline further in the following years; insofar as in 2004 only 36
percent of the public sector employers and 1 percent of the private sector companies
still had pay arrangements whose mechanism was controlled by a collective agreement.

The end of this
long-established system has enabled employers to introduce and develop pay
systems aiming at rewarding individual skills, efforts and performance and to gain
a higher level of flexibility in the design, development and expansion of their
value proposition.

In the last two
decades, reward has attracted the growing interest of consultants and academic
researchers so that a considerable literature on the subject has been indeed made
available. All of that has enabled employers and managers to develop and
implement bespoke reward practices helping these to meet their specific
organizational needs and objectives. Nonetheless, as pointed out by Armstrong
et al (2005), a worrying “knowing-doing gap” still remains.

Since in many
organizations the activities aiming at identifying the most suitable pay
arrangements are presently underway, it can be argued that to some extent some
reward approaches are still somewhat of on probation. The debate on the
effectiveness, efficiency and fairness of the different reward models developed
by employers and their reward managers is hence still rife and passionate.

Reward Management

First and foremost,
it could be interesting to find out why the term reward itself has been used to
refer to the whole range of benefits, in addition to pay, an employee receives
from his employer in exchange for his work.

As aptly stressed
by Torrington et al. (2008), the term “payment” would have been too limited in
scope in that many of the rewards an employee receives for his/her work are actually
no longer paid in cash.

The term
“compensation”, widely used in the American literature, mostly gives the idea
of making amends for something that has caused loss or injury to someone else,
which would not definitely be the most appropriate idea to provide individuals about
the outcome produced by their work.

The word
“remuneration” has the same meaning as “payment”; additionally, it allegedly is
the most misspelled (renumeration) word in the HR lexicon.

“Reward” would not indeed be the best term to
use either in that it suggests the idea of a special payment for a special act;
nonetheless, amongst the available options, it emerged as the most appropriate and
suitable term.

Considering the
issue from the transactional viewpoint, and to some extent from the psychological
contract point of view, it would not be completely incorrect to refer to the
term “return”, but it would risk revealing inappropriate and misleading by
reason of it not taking into consideration the remarkable efforts employers are
actually making to offer their employees a diversified value proposition, that
is, a reward package formed by several components combined together to make the
work rewarding and worthwhile; what is today known as “total reward.”

All of the
activities performed within an organisation are basically aimed at supporting
the attainment of the business strategy developed by its business leaders. These
strategies should consequently inspire the policies, procedures, practices and
actions developed within each function existing within an organisation. The
organizational functions can in turn differently influence the overall business
strategy according to the knowledge each of these can contribute to the development
of informed and realistic, but also profitable, suitable and viable strategies.

Reward management
makes no exception. As claimed by Armstrong (2006), reward management basically
is about the formulation and execution of strategies, policies, practices and
procedures developed with the aim of rewarding employees fairly, equitably and
consistently in accordance with the business culture and beliefs. These are
thus intended at enabling the organisation to achieve its overall strategic aim
and objectives.

Reward policies not
only need to be consistent and coherent with the business strategy, but must also
reflect the organisation’s culture and its shared values and beliefs in order
to ultimately inspire and foster integrity within the organisation.

Employees
are becoming the more and more sensitive to and wary and intolerant of the
discrepancies existing between what an employer states and say and what this actually
does and executes in practice. Employers definitely need hence to pay attention
to this aspect and invariably avert to talking the talk but not walking the
walk.

While formulating
reward practices employers should constantly give serious and careful consideration
to the main aims the organisation intends to pursue by means of the policies
themselves.

As suggested by
Armstrong (2006), to this extent there are some mandatory tenets which need to
be taken into consideration, such as:

- Consider and
reward employees according to what the company values the most,

- Reward employees
for the value these create in order to develop a clear performance culture
within the organisation,

- Use reward to
make it clear what behaviour and outcomes are considered important by the employer,

- Employ reward to attract
and retain the right individuals necessary to the firm,

- Develop a total
reward system encompassing both financial and non financial reward,

- Consider what
employees value, in addition to what it is important for the employer, hence focus
on finding a good balance and trade-off between the two interests,

- Operate transparently, consistently, fairly
and equitably.

Organisation and reward values and beliefs

Reward management should
aim at supporting the business by means of enabling it to achieve its intended strategy.
To successfully attain this objective, it is necessary to develop in turn the
reward management values and guiding principles, which will clearly be inspired
by the organisational values and beliefs. Armstrong (2006) defines reward management’s
sets of values and guiding principles as the “philosophy of reward management.”

The foundations of
reward management at large lie in consistency, transparency, equity and
fairness.

This does not clearly
mean that all of the employees have to receive exactly the same amount of
“reward.” A reward philosophy underpinned by the idea of valuing human capital,
for instance, will aim at rewarding individuals according to the different degree
of contribution these make to the organisation’s success, profitability and
growth, and on the return on the investment these are able to generate.

This is a point employees
may be prone to miss so that a clear, open and extensive communication process on
what the reward practices are intended to pursue within the organisation should
be definitely implemented and periodically refreshing sessions organised.

Line managers,
after having received a thorough and specific training programme, definitely
represent a central and fundamental part of this process. Yet, in order to avert
later undesirable misunderstandings, which may also be perceived by employees
as a breach of their psychological contract, employers should better devote
part of the induction process to explain to their new recruits the guiding
principles, values and beliefs, that is to say the philosophy, behind their
reward practices. It would also help to make it clear to newcomers what the
organisation is expected from them in terms of behaviour and desired standard
of performance, and what and how the firm assesses and rewards work and performance.

Reward management
values and guiding principles, consistently with the overall business values
and strategy, need to enable the organisation to address rewarding problems in
the long-run and to identify suitable and fair solutions to reward people
according to their real level of performance and actual achievements.

In order to
motivate, engage and ultimately retain staff reward management also has to be
based on the total reward idea and need thus to considers both the intrinsic
and the extrinsic aspects of reward, which linked as a whole to the other HR
initiatives will produce a multiplicative bundle-like effect boosting
motivation and engagement within the business.

In order to achieve this result reward
management practices need to be not only vertically aligned with the overall business
strategy, but also horizontally aligned with the HRM strategies of which reward
is indeed part, too.

Business and HR
strategies are not the only factors having a remarkable impact on reward
management, which is also considerably affected by the pressure coming from the
endogenous and exogenous environment. An example of the pressure exercised by
the internal environment is, for instance, represented by the importance the
firm’s top management attaches to reward, whereas an example of the pressure coming
from the external environment is represented by the market rates characterizing
the relevant labour market.

Having a clear idea
of the different economic theories underpinning the pay level decision-making
process and gaining a thorough understanding of the practical significance of
each of them, would definitely reveal particularly interesting and useful for
employers to make informed decisions about their positioning in the “reward
market.”

The law of supply and demand

It works exactly as
the law of supply and demand regulating any other market and product. When
labour supply exceeds the relative demand, pay levels decrease; vice versa,
when there is a lack of labour and demand hence outweigh supply, pay levels
increase.

In this case the
market rates are basically linked to, and influenced by, the market trends and
factors.

Efficiency wage theory

Also known as
“economy of high wages theory”, this theory is based on the principle that
paying higher than market rate salaries will enable organisations to attract,
retain and motivate individuals. This theory is also aimed at curbing labour
turnover and persuading employees that they are treated fairly.

Organisations
resort to this theory when aiming at being considered as market leaders or
above-the-average employers.

Human capital theory

This theory aims at
building on the individual education and skills in order to generate productive
capital. This approach is intended to lead to a win-win situation for both the employer
and the employee: good pay for the employee, good return on investment expected
by the employer.

Agency theory

The owners or principals
of an organisation are separated by their agents or employees; this is likely
to generate “agency costs” in that agents are unlikely to be as productive as
principals would. These need therefore to find effectual ways to motivate and
engage them.

This theory
requires the development and introduction of an incentive scheme aiming at paying
employees according to the measureable results these yield.

This theory is also
applied to the business managers. In this case, the agency costs is intended to
avert that managers may use their role to their personal benefit, rather than
to that of the business owner or principal.

The effort bargain

According to this
approach, employers have to determine the right level of reward for each
employee in order to this performing at his/her best. Bargaining is hence seen
as a means to an end both for employees and employers. The former want to be
fairly awarded for their efforts, whereas the latter aim at offering what it
takes, and no more, to receive the required and expected contribution to the
attainment of the organizational objectives. Rates of pay are thus bargained by
individuals and organizations according to the skills the individuals actually possess
and the significance and worthiness employers attach to those capabilities.